Sale of UK gold reserves, 1999–2002

The sale of UK gold reserves was a policy pursued by HM Treasury over the period between 1999 and 2002, when gold prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.

The period takes its name from Gordon Brown, the then UK Chancellor of the Exchequer (who later became Prime Minister), who decided to sell approximately half of the UK's gold reserves in a series of auctions. At the time, the UK's gold reserves were worth about US$6.5 billion, accounting for about half of the UK's US$13 billion foreign currency net reserves.

Events

The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce (cf. the price in 1980: $850/oz ) The official stated reason for this sale was to diversify the assets of the UK's reserves away from gold, which was deemed to be too volatile. The gold sales funded a like-for-like purchase of financial instruments in different currencies. Studies performed by HM Treasury had shown that the overall volatility of the UK's reserves could be reduced by 20% from the sale.

The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July. The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.

To deal with this and other prospective sales of gold reserves, a consortium of central banks - including the European Central Bank and the Bank of England - were pushed to sign the Washington Agreement on Gold in September 1999, limiting gold sales to 400 tonnes per year for 5 years. This triggered a sharp rise in the price of gold, from around US$260 per ounce to around $330 per ounce in two weeks, before the price fell away again into 2000 and early 2001. The Central Bank Gold Agreement was renewed in 2004 and 2009.

Cost

Gold prices remained relatively low until 2001, when the price began consistently rising in a protracted bull market. By 2007, the price of gold had reached US$675, and the loss to the UK taxpayer (contrasted to selling the gold later) was estimated at more than £2 billion, as the Euros bought with the proceeds had also risen in value. The gold price briefly passed US$1,000 per ounce in March 2008, before reaching all-time highs of $1,043.77 on 6 October 2009 and $1,048.40 on 7 October 2009, on which day a hypothetical sale of the same gold (with timing chosen by hindsight, and if this volume could somehow be sold without driving down the market price) would have made an extra £4 billion. Gold prices continued to rise, reaching a new all-time high of US$1,896.50 per ounce at the London morning Gold Fix of 5 September 2011. Since then they have steadily fallen to about US$1,200 in April 2015. Gold prices had further fallen to around US$1,100 by the end of October 2015.

Analysis

Brown's actions have attracted considerable criticism, particularly concerning his timing, his decision to announce the move in advance, and the use of an auction. The decision to sell gold at the low point in the price cycle has been likened to the mistakes in 1992 that led to Black Wednesday, when the UK was forced to withdraw from the European Exchange Rate Mechanism, which HM Treasury has estimated cost the UK taxpayer around £3.3 billion.

As of December 2013, the UK retained a gold reserve of 310.3 tons.

See also

• Gold as an investment